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Time to rethink liabilities

Since the UK’s Universities Superannuation Scheme (USS) revealed its deficit figures earlier this year, the £60bn (€67bn) scheme is under increasing pressure to review its governance and justify its investment decisions. There is also the looming threat of a government enquiry to stop the cost of the scheme being passed on to current and future students.

Some of the criticism has been unfair: USS is a sophisticated, innovative investment house that is allocating more and more towards alternative assets, and its investment returns have been strong in recent years (more than 20% in 2016-17).

USS would certainly find sympathy in the Netherlands. Research by financial daily newspaper FD showed that a significant number of schemes saw their funding ratios decline in 2016 purely because their liabilities increased (see the chart on this page). 

The fact that funding positions are worse despite positive investment results is largely down to the same factors affecting defined benefit schemes across Europe: falling bond yields and rising life expectancy. Both of these are beyond the influence of pension trustees and managers. 

Liabilities are estimates of future obligations, but the calculations have already affected past and present savers and retirees. In the Netherlands, some have had their pensions reduced, while in the UK rising costs have prompted a wholesale shift towards less generous defined contribution plans. In each case, savers have lost out and will continue to do so. 

Liabilities are hugely volatile depending on the calculation used. Just small changes to assumptions can have a huge effect: see p10 to find out how Tesco halved its multi-billion-pound deficit by changing one input.

While the liability story is not the whole picture, it seems grossly unfair that so many decisions with profound effects on people’s future wellbeing can be traced back to an actuarial calculation that can, and does, vary drastically from year to year.

As the institutional world focuses more on a long-term approach to asset portfolios, it is high time regulators allowed a similar approach to liabilities.

Nick Reeve, News Editor
nick.reeve@ipe.com

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